Site Search Navigation

Site Navigation

Site Mobile Navigation

The two Americas

October 20, 2007 4:38 pmOctober 20, 2007 4:38 pm

More than two years ago I argued that to appreciate the extent of the housing bubble you had to make a distinction between regions:

Many bubble deniers point to average prices for the country as a whole, which look worrisome but not totally crazy. When it comes to housing, however, the United States is really two countries, Flatland and the
Zoned Zone.

In Flatland, which occupies the middle of the country, it’s easy to build houses. When the demand for houses rises, Flatland metropolitan areas, which don’t really have traditional downtowns, just
sprawl some more. As a result, housing prices are basically determined by the cost of construction. In Flatland, a housing bubble can’t even get started.

But in the Zoned Zone, which lies along the coasts, a combination of high population density and land-use restrictions – hence “zoned” – makes it hard to build new houses. So when people
become willing to spend more on houses, say because of a fall in mortgage rates, some houses get built, but the prices of existing houses also go up. And if people think that prices will continue to rise, they
become willing to spend even more, driving prices still higher, and so on. In other words, the Zoned Zone is prone to housing bubbles.

And Zoned Zone housing prices, which have risen much faster than the national average, clearly point to a bubble.

But why aren’t housing prices falling in Manhattan? They haven’t fallen at all. If any area would qualify as part of the bubble-prone “zoned zone” it would be Manhattan. But so far, prices
there are stable.

From the map, it looks as though the “zoned zone” consists of about four states – California, Nevada, Arizona and Florida. (My guess is that the price depreciation in Louisiana is due to Hurricane
Katrina.) I’ve read stories about people investing in homes for speculative purposes in three of the four states (California, Nevada and Florida) and it wouldn’t surprise me if they were doing
it in Arizona, too.

There’s definitely some legs to this argument but I think you can determine the specific cities that the Zoned Zones apply to – Boston, LA, New York, San Fran, Miami. Do the same Zoned Zone principles
hold true for smaller coast cities such as Worcester (MA), Ft. Lauderdale (FL), Eerie (PA)? It seems as if, because the city limits have room to expand, they would fall into the Flatland category.

Speaking from the Zoned Zone—the competition is so fierce, the prices so astronomical, even a supposed deflation is not felt as any relief yet…there’s not even much “rise in inventory”
in the most boiling of bubble pockets…

There STILL have to be so many of us who were priced so ridiculously fast, so insanely far, out of the market—I have decided the only salvation for us, who are still renting, but whose nest eggs aren’t
large enough for a down payment: take advantage of the weakening dollar in the world economy in foreign stocks. There has to be some way for us to make money on top of our hourly wages, and not be had by corrupt
lending schemes, even for the tiny investor. I am keeping my fingers crossed that international markets are the answer for Americans who were gypped by U.S. banks into loans and fees that robbed their fortunes.

Mr. Krugman, I’m curious what you think of the exceptions of Oregon and Washington. Because of its urban growth boundaries, building land is at a particular premium in Oregon. And in Seattle at least, land
for building is highly restricted due to a combination of zoning and geography. Yet Oregon and Washington are notable exceptions to the housing bubble problem; though the rate of increase in housing prices has
slowed, property values are still going up in both of these states.

Just wait until oil price rises start biting in Flatland. BTW, Flatland has very intense zoning, too. I don’t think it would *be* Flatland without zoning; without zoning, Flatland would probably be trolleyland;
two-story row houses are an ancient urban pattern.

The two problems with the map is that it doesn’t identify what HPI is and what it actually means and the information is broken up by state which leads to the idea that conditions in Rochester are the same
as in Scarsdale.

I disagree. The area that I know, CA, is divided into zoned zones in the Bay Area, San Diego and coastal LA, but the Central Valley is flatland. And while home prices have dropped precipitously in the state as a
whole, in the more well-off portions of LA, SD and SF metro areas, not so much – some prices have risen. The difference doesn’t seem to be zoning laws or lack of available property to build, but
sub-prime loan percentage. In fact, it seems that the rich are getting richer, and are willing to pay what it takes to live in established communities (which have known good schools, reasonable commutes, and
upscale living) while the low-income people are getting a double whammy of tight money and many foreclosures flooding the market.

I can only speak for the SF Bay Area, but from what I can see here, your theory does not hold up. In the central Bay Area, where the “zoned zone” you describe exists, housing prices so far have held
firm, and people I know who have recently purchased houses in desirable communities tell me they had to confront multiple bids on the homes they sought.

Where prices have declined and where builders are auctioning off unsold new homes has been in the more outlying areas, and especially further out towards the central valley, where the Flatland conditions you describe
exist.

Elvis, #8: the basic answer is that Detroit was destroyed by racism. (Baltimore, too.) Yo, prof! Racism and the housing market could be a really interesting thing to hear more about. (I also suspect it’s
why Seattle doesn’t have a subway system, or moral equivalent.)

As a planner, I’m a little shocked to see one of my favorite economists being so reductionist– I wouldn’t presume to lump all the subtle aspects of economics into an “economic economy”
and make generalizations. It’s just more complicated than that.

Zoning laws differ from place to place, within and between states. In NY, for instance, the municipal law makes it very difficult to add territory to a city. But, in many other states, with plenty of zoning, that
is not the case. And, that does not necessarily mean that where the city can’t change its borders there is no sprawl– sometimes, as per upstate NY cities outside the Hudson Valley, the effect is
MORE sprawl.

It is surely true that the price of housing is doing different things in different places– to the point that the statewide averages may obscure more than they illuminate. In Detroit or Baltimore, Randolph
Fritz has the answer above, I think. But, Coastal California may be more about crowding and speculation. This makes it hard for people to agree about even what the problem is, let alone the solution, because,
where the Detroit resident sees evidence of predation all around, the resident of California sees irresponsible speculators. Some of each both places, surely, but in a different mix.

And, diced, sliced, structured-investment-vehicled, who can tell what is what in that mystery meat?

Robinia, thanks for the kind words. I think one problem in places like the SF Bay Area is that most of the urban land outside of the older cities–San Francisco, Oakland, Berkeley–is zoned at low densities.
This raises prices and has become part of a policy of supporting housing prices. There is a very odd sort of class prejudice at work; we see the curious idea that the “character of the neighborhood”
is preserved while the people who live there go from working class to moderately rich (upper middle class, if we are going to be picky about it). Would there be a bubble in the Bay Area without the density restrictions?
I don’t think one would be possible, though there might be a lot of people who wished they weren’t renting.